Excessive Trustee Discretion: Key Risks (2025)

Excessive discretion can imperil a trustee when decisions are made without a defensible link to the trust deed, proper purpose, and documented reasoning—because Australian courts can set aside trustee decisions for breach of trust, improper purpose, bad faith, or failure to give genuine consideration, and the ATO can challenge outcomes where “discretion” is used to engineer tax results without commercial or fiduciary rationale. From an Australian accounting practice perspective, the practical danger is that “flexibility” (especially around trust distributions, streaming, and trust records) becomes legal and tax exposure for the trustee, often surfacing only during disputes, audits, or deceased estate events.

What does “excessive discretion” mean for a trustee in Australia?

Excessive discretion means the trustee treats the trust as if it is their own asset pool and makes decisions that are not anchored to the deed, fiduciary duties, and the purpose of the power being exercised. The risk is not that a trustee has discretion; the risk is exercising it carelessly, self-interestedly, or without evidence of a proper decision-making process.

• Distributions “decided” after year-end (or documented late) to chase tax outcomes.
• Streaming capital gains or franked distributions without meeting deed and tax requirements.
• Treating unpaid present entitlements (UPEs) casually (including Division 7A consequences where corporate beneficiaries are involved).
• Using trust funds for controllers’ private expenses without clear authority or accounting treatment.
• Ignoring conflicts, such as the trustee/director benefiting over other beneficiaries.

When can a trustee’s discretion be set aside by courts?

A trustee’s discretion can be set aside when it is exercised outside power or in breach of fiduciary obligations. Australian trust law recognises that a discretionary power is not unfettered; it must be exercised in accordance with the deed and for a proper purpose.

• Acting beyond power (ultra vires): The deed does not permit what was done (for example, invalid beneficiaries, invalid streaming, or missing procedural steps).
• Improper purpose: A power is used for an object it was not intended to achieve (for example, using appointment/removal or distribution powers to oppress a beneficiary or extract a personal benefit).
• Bad faith: Decisions made dishonestly or with intentional disregard for beneficiaries’ interests.
• Failure to give genuine consideration: The trustee “rubber stamps” a distribution or decision without actually considering relevant factors (beneficiary circumstances, deed requirements, trust purpose, tax implications where relevant, liquidity, etc.).
• Taking irrelevant considerations into account or ignoring relevant ones: For example, distributing income to someone with known incapacity to receive it, or ignoring the trust’s cash position and creating unpayable entitlements.

Practical accounting takeaway: a trustee can lose the protection that “it was discretionary” if the process and evidence indicate the discretion was not properly exercised.

How does excessive discretion create Australian tax risk (ATO focus)?

Excessive discretion creates tax risk when it produces outcomes that do not match the trust deed, trust law, or the tax provisions governing trust income, beneficiary entitlement, and streaming. The ATO will typically focus on whether beneficiaries were made presently entitled to income and whether the purported character of distributions (capital gains, franked distributions) was validly streamed.

• Late or inconsistent distribution documentation.
• Mismatch between resolutions, accounts, and beneficiary statements.
• Streaming without clear deed authority and without meeting tax requirements.
• UPEs owed to related corporate beneficiaries that are left outstanding (Division 7A risk depending on structure and facts).
• Private use of trust funds with no loan documentation or trustee authorisation.
• Patterns suggesting tax-driven allocations without commercial rationale.

• Income tax treatment of trust income and beneficiary entitlement: The operation of trust assessment provisions (commonly engaged in everyday practice) depends heavily on valid present entitlement and correctly determined trust income under the deed.
• Streaming integrity: The ATO has issued detailed guidance over time on when and how streaming is effective, and when it is not, depending on deed powers and the steps taken.
• Record-keeping expectations: The ATO expects contemporaneous records supporting positions taken in returns, including trust distribution resolutions and working papers.

Professional note: This article is general information only. Trust taxation is deed- and fact-dependent, and ATO views can evolve. File notes, deed review, and specialist advice are often essential.

When do trust distribution decisions most commonly imperil trustees?

Trust distributions most commonly imperil trustees when they are treated as an annual “tax exercise” rather than a fiduciary decision with legal formality.

High-risk scenarios seen in Australian practices include:

• Scenario 1: Late 30 June “minute” and backdating

• Scenario 2: Streaming capital gains without deed support

• Scenario 3: Distributing to a bucket company but leaving UPE unmanaged

• Scenario 4: “Whatever minimises tax” as the only rationale

Why do conflicts of interest magnify trustee liability?

Conflicts of interest magnify trustee liability because trustees owe fiduciary duties, including duties to act in beneficiaries’ interests and avoid unauthorised conflicts. Many Australian family trusts have controllers who are also beneficiaries, appointors, directors, or advisers—so conflicts are structurally common and must be actively managed.

• Trustee paying “management fees” to a controller entity without deed authority, market basis, or documentation.
• Trustee making loans to related parties without clear terms, security (where appropriate), or evidence of benefit to the trust.
• Trustee prioritising one beneficiary group (for example, one branch of a family) without a rational basis consistent with the trust’s purpose.

• Explicitly identifying conflicts in trustee minutes.
• Demonstrating genuine consideration of beneficiary interests.
• Obtaining independent advice where stakes are high (for example, large CGT events, contested families, deceased estates).

How do documentation failures turn discretion into personal exposure?

Documentation failures turn discretion into personal exposure because a trustee’s “best intentions” are rarely enough when challenged by beneficiaries, liquidators, or the ATO. Contemporaneous documentation is often the difference between a defensible exercise of power and an indefensible assertion.

• The trust deed is reviewed for:
• Trustee resolutions are:
• Working papers show:
• Beneficiary statements align with:

Practical warning: where the “paper trail” is created after the fact, it often collapses under audit or dispute.

What Australian legislation and ATO guidance are most relevant?

Trustee discretion problems typically intersect both trust law principles and the tax law framework governing trust income and distributions. From an accounting practice perspective, the most frequently relevant sources include:

• Income Tax Assessment Act 1936 (Cth):
• Income Tax Assessment Act 1997 (Cth):
• Corporations Act 2001 (Cth):
• ATO guidance on trust distributions and streaming:

Because ATO guidance can be updated and is heavily fact-specific, it should be checked for the relevant income year (for example, 2024–25 and 2025–26 positions) when advising or preparing returns.

How should an Australian accounting practice reduce trustee discretion risk?

Risk is reduced by turning trustee discretion into a controlled governance process with clear evidence and repeatable steps.

1. Deed-first review
2. Pre-30 June distribution planning meeting
3. Draft resolution pack
4. Execute by the deed deadline
5. Align accounts, tax returns, and beneficiary statements
6. Manage UPEs and related-party positions
7. Retention of records

How does this compare with “manual” trust governance vs automated working papers?

Manual trust governance increases risk because it relies on inconsistent templates, fragmented spreadsheets, and end-of-year pressure—precisely when trustee discretion is most likely to be poorly evidenced.

• Centralised working papers and version control
• Standardised trustee minute packs per deed type
• Automated reconciliation and documentation consistency checks

• MyLedger (Fedix): Automated working papers, ATO-integrated data capture, and reconciliation workflows designed to reduce manual assembly and improve documentation integrity.
• Traditional workflow (spreadsheets + general ledger tools like Xero/MYOB/QuickBooks): Often requires manual Excel working papers, manual cross-checking, and separate storage of trustee minutes—more time, more inconsistency, and higher dispute/audit vulnerability.

This is where “AI accounting software Australia” solutions can be relevant: the value is not only speed, but defensibility through consistent evidence trails.

What are practical “red flags” that the trustee’s discretion is becoming excessive?

A trustee’s discretion is becoming excessive when process quality declines and outcomes appear engineered rather than administered.

• Resolutions prepared after year-end or repeatedly “re-done”
• Distributions to beneficiaries who cannot be contacted, do not understand entitlements, or never receive funds
• Repeated large UPEs with no repayment plan
• Streaming claims without deed review evidence
• Frequent reclassifications and journal entries late in the process without source support
• Mixing of trust and personal funds without clear authority and accounting treatment

Next Steps: How Fedix can help reduce trustee risk

Fedix helps Australian accounting practices reduce trustee risk by making the compliance process faster, more consistent, and easier to evidence. MyLedger is designed to bring reconciliation, reporting, and working papers into one workflow so that trustee decisions are supported by traceable records.

• Using MyLedger to speed up month-end and year-end close with automated bank reconciliation (10–15 minutes per client versus 3–4 hours in manual processes)
• Centralising trust workpapers so distribution calculations, journals, and reports remain consistent
• Improving audit readiness by keeping supporting documentation aligned and easy to reproduce

Learn more at home.fedix.ai and assess whether MyLedger fits your trust compliance workflow for the 2025–2026 tax year.

Conclusion

Excessive trustee discretion imperils trustees when it is exercised without authority, proper purpose, genuine consideration, and defensible documentation—creating exposure to beneficiary claims, court intervention, and ATO challenge. Australian accounting practices reduce these risks by deed-led governance, on-time resolutions, consistent accounting and tax disclosure, and strong working paper discipline. The operational reality is that better systems and tighter processes are often the most cost-effective risk controls.

Frequently Asked Questions

Q: When can a trustee be personally liable for using discretion badly?

Q: Does the ATO care if a trustee minute is signed after 30 June?

Q: What is the biggest practical risk area for trustees in Australian family trusts?

Q: How can an accounting practice evidence “genuine consideration” by a trustee?

Q: Can better software reduce trustee risk, or is this purely legal?

Disclaimer: This content is general information for Australian accounting professionals as at December 2025 and does not constitute legal or tax advice. Trust law and trust taxation are highly fact- and deed-dependent. Advice should be obtained from a suitably qualified Australian tax adviser and, where appropriate, a trust law specialist before implementing any strategy.